UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 2, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-14987
TOO, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1333930
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8323 Walton Parkway, New Albany, OH 43054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 775-3500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days (or such shorter time as the Company became
effective).
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at December 9, 2002
------------ --------------------------------
$.01 Par Value 34,090,811 Shares
1
TOO, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks Ended
November 2, 2002 and November 3, 2001 ................................................... 3
Consolidated Balance Sheets
November 2, 2002 and February 2, 2002 ................................................... 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
November 2, 2002 and November 3, 2001 ................................................... 5
Notes to Consolidated Financial Statements ................................................... 6
Report of Independent Accountants ............................................................ 11
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................. 17
Item 4. Controls and Procedures ................................................................. 17
PART II. Other Information
Item 1. Legal Proceedings ....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K ........................................................ 18
Signature ....................................................................................... 19
Certifications .................................................................................. 20
Exhibit Index ................................................................................... 22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TOO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- --------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 164,629 $ 148,763 $ 464,468 $ 410,888
Costs of goods sold, buying and
occupancy costs 105,608 97,381 302,479 273,569
----------- ----------- ----------- -----------
Gross income 59,021 51,382 161,989 137,319
General, administrative and store
operating expenses 41,606 37,968 125,029 112,204
----------- ----------- ----------- -----------
Operating income 17,415 13,414 36,960 25,115
Interest (income) expense, net (121) 74 648 583
----------- ----------- ----------- -----------
Income before income taxes 17,536 13,340 36,312 24,532
Provision for income taxes 6,700 5,300 14,100 9,800
----------- ----------- ----------- -----------
Net income $ 10,836 $ 8,040 $ 22,212 $ 14,732
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.32 $ 0.26 $ 0.67 $ 0.48
=========== =========== =========== ===========
Diluted $ 0.31 $ 0.25 $ 0.65 $ 0.46
=========== =========== =========== ===========
Weighted average common shares:
Basic 34,061 31,042 32,990 30,931
=========== =========== =========== ===========
Diluted 34,903 32,131 33,980 31,882
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
November 2, February 2,
2002 2002
----------- -----------
(unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 88,227 $ 63,538
Receivables 3,502 2,547
Inventories 55,698 44,537
Store supplies 11,263 10,357
Other 1,360 2,409
----------- -----------
Total current assets 160,050 123,388
Property and equipment, net 145,940 126,415
Deferred income taxes 14,262 14,786
Other assets 1,140 988
----------- -----------
TOTAL ASSETS $ 321,392 $ 265,577
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion long-term debt $ - $ 17,500
Accounts payable 25,640 23,341
Accrued expenses 46,069 39,036
Income taxes payable 11,438 19,696
----------- -----------
Total current liabilities 83,147 99,573
Long-term debt, less current portion - 32,500
Other long-term liabilities 7,754 5,295
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares authorized - -
Common stock, $.01 par value, 100 million shares
authorized, 34.1 million and 31.3 million issued and
outstanding at November 2, 2002 and February 2, 2002, respectively 341 313
Paid in capital 115,380 35,338
Retained earnings 114,770 92,558
----------- -----------
Total shareholders' equity 230,491 128,209
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 321,392 $ 265,577
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Thirty-Nine Weeks Ended
------------------------------
November 2, November 3,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 22,212 $ 14,732
Impact of other operating activities on cash flows:
Depreciation and amortization 14,248 13,621
Changes in assets and liabilities:
Inventories (11,161) (12,868)
Accounts payable and accrued expenses 9,921 6,539
Income taxes (5,896) (2,132)
Other assets 722 (2,153)
Other liabilities 2,459 1,111
------------- -------------
Net cash provided by operating activities 32,505 18,850
------------- -------------
Investing activities:
Capital expenditures (36,047) (54,030)
------------- -------------
Net cash used for investing activities (36,047) (54,030)
------------- -------------
Financing activities:
Net proceeds from issuance of common stock 73,394 -
Repayment of term loan (50,000) -
Stock options, restricted stock and other equity changes 4,837 4,428
------------- -------------
Net cash provided by financing activities 28,231 4,428
------------- -------------
Net increase (decrease) in cash and equivalents 24,689 (30,752)
Cash and equivalents, beginning of period 63,538 54,788
------------- -------------
Cash and equivalents, end of period $ 88,227 $ 24,036
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
Too, Inc. (referred to herein as "Too" or "the Company") is the
operator of two specialty retailing businesses, Limited Too and
mishmash. Limited Too sells apparel, underwear, sleepwear, swimwear,
lifestyle and personal care products for fashion-aware, trend-setting
young girls ages seven to fourteen years. mishmash, launched by the
Company in late September 2001, sells cosmetics, sportswear, intimate
apparel and footwear to young women ages fourteen to nineteen. The
assortment also includes accessories, jewelry, room decor furnishings
and lifestyle products. Goldmark, a 50% joint venture with Angus &
Coote (Holdings) Limited, was launched in late October 2002. Goldmark
offers real gold and sterling silver jewelry, watches, diamond rings
and body jewelry to men and women ages 15 to 30. The consolidated
financial statements include the accounts of Too, Inc. and its wholly
owned subsidiaries and reflect the Company's assets, liabilities,
results of operations and cash flows on a historical cost basis.
The accompanying unaudited interim consolidated financial statements as
of November 2, 2002 and for the thirteen and thirty-nine weeks ended
November 2, 2002 and November 3, 2001, are presented to comply with the
rules and regulations of the Securities and Exchange Commission.
Accordingly, these consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto contained in the Company's 2001 Annual Report on Form 10-K. In
the opinion of management, the accompanying interim consolidated
financial statements reflect all adjustments (which are of a normal,
recurring nature) necessary to present fairly the financial position,
results of operations and cash flows for the interim periods, but are
not necessarily indicative of the results of operations for a full
fiscal year.
The consolidated financial statements as of November 2, 2002, and for
the thirteen and thirty-nine weeks ended November 2, 2002 and November
3, 2001 included herein have been reviewed by the independent public
accounting firm of PricewaterhouseCoopers LLP and the report of such
firm follows the notes to consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for its report on the
consolidated financial statements because that report is not a "report"
within the meaning of Sections 7 and 11 of that Act.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if stock options or restricted stock were converted to common
stock using the treasury stock method.
6
The following table shows the amounts used in the computation of basic
and diluted earnings per share (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- -----------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income $ 10,836 $ 8,040 $ 22,212 $ 14,732
============= ============= ============= =============
Weighted average common shares - basic 34,061 31,042 32,990 30,931
Dilutive effect of stock options
and restricted stock 842 1,089 990 951
------------- ------------- ------------- -------------
Weighted average common shares - diluted 34,903 32,131 33,980 31,882
============= ============= ============= =============
Due to the options' strike price exceeding the average market price of
the common shares for the reporting periods, certain options were
excluded from the calculation of net income per diluted share. In
fiscal 2002, options to purchase 853,000 and 140,700 common shares were
not included in the computation of net income per diluted share for the
thirteen and thirty-nine weeks ended November 2, 2002, respectively. In
fiscal 2001, options to purchase 150,000 and 215,400 common shares were
not included in the computation of net income per diluted share for the
thirteen and thirty-nine weeks ended November 3, 2001, respectively.
3. INVENTORIES
The fiscal year of the Company is comprised of two principal selling
seasons: Spring (the first and second quarters) and Fall (the third and
fourth quarters). Inventories are principally valued at the lower of
average cost or market, on a first-in, first-out basis utilizing the
retail method. Inventory valuation at the end of the first and third
quarters reflects adjustments for inventory markdowns and shrinkage
estimates for the total selling season.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, consisted of (in thousands):
November 2, February 2,
2002 2002
------------- -------------
Land $ 8,041 $ 7,797
Buildings 41,266 -
Furniture, fixtures and equipment 134,114 105,554
Leasehold improvements 38,717 45,408
Construction-in-progress 5,744 49,069
------------- -------------
Total 227,882 207,828
Less: accumulated depreciation and amortization (81,942) (81,413)
------------- -------------
Property and equipment, net $ 145,940 $ 126,415
============= =============
7
5. RELATIONSHIP WITH THE LIMITED
In connection with the August 23, 1999 Spin-off, the Company entered
into a service agreement with Limited Logistics Services (formerly
known as Limited Distribution Services), a wholly owned subsidiary of
The Limited, to provide distribution services to us covering flow of
merchandise from factory to our stores for up to three years after the
Spin-off. Most of the merchandise and related materials for the
Company's stores were shipped to a distribution center owned by The
Limited in Columbus, Ohio, where the merchandise was received,
inspected, allocated and packed for shipment to stores. Under the
service agreement, The Limited distributed merchandise and related
materials using common and contract carrier s to the Company's stores.
Inbound freight was charged to Too based upon actual receipts and
related charges, while outbound freight was charged based on a
percentage of cartons shipped. Beginning in February 2002, the Company
began operating its own distribution center and subsequently terminated
the service agreement in mid 2002.
Our main office was owned by Distribution Land Corp., a wholly owned
subsidiary of the Limited, and leased to us with a lease term expiring
in August 2002. In April 2002, the Company completed construction of
its new home office and terminated the aforementioned lease.
Our largest apparel supplier has been Mast Industries, Inc., a wholly
owned subsidiary of The Limited. Mast Industries supplied approximately
30% of the apparel that we purchased in 2001. We believe that all
transactions that we have entered into with Mast Industries have been
on terms that would have been obtained on an arm's length basis since
we treat them as if they were a third party. We were not, and will not
be, obligated to continue to source products through Mast Industries.
Amounts payable to The Limited, including merchandise payables to Mast
Industries, approximated $6.6 and $8.0 million at November 2, 2002 and
February 2, 2002, respectively.
6. CREDIT FACILITY
During August 1999, the Company entered into a five-year $100 million
credit agreement (the "Credit Facility") with a syndicate of banks. The
Credit Facility is collateralized by virtually all assets of the
Company and was comprised of a $50 million five-year term loan and a
$50 million revolving loan commitment. The entire amount of the term
portion was drawn in order to fund a $50 million dividend to The
Limited and $14 million was drawn under the revolving loan commitment
principally to repay a portion of working capital advances made by the
Limited prior to the Spin-off.
The $50 million revolving loan commitment is available to fund working
capital requirements and for general corporate purposes. Interest on
borrowings under the Credit Facility is based on matrix pricing applied
to either the London Interbank Offered Rate or Prime, as defined in the
agreement. A commitment fee based on matrix pricing is charged on the
unused portion of the revolving loan commitment. The commitment fee is
up to 1/2 of 1% of the unused revolving credit commitment per annum.
Under the terms of the Credit Facility, the Company is required to
comply with certain covenants including financial ratios. The Credit
Facility limits the Company from incurring certain additional
indebtedness and restricts substantial asset sales, capital
expenditures above approved limits and cash dividends. The Company is
in compliance with all applicable terms of the Credit Facility. As of
November 2, 2002, there were no amounts outstanding under the revolving
portion of the Credit Facility.
On May 24, 2002, the Company paid off the entire $50 million term loan
due under the Credit Facility. The $50 million revolving loan
commitment under the Credit Facility remains in effect and is available
to the Company for future business purposes.
8
Interest expense, including financing fees, amounted to $239,000 for
the thirteen weeks ended November 2, 2002. Interest expense was more
than offset by interest income of $360,000 for the quarter. Interest
expense and interest income amounted to $916,000 and $842,000,
respectively, for the thirteen weeks ended November 3, 2001. For the
thirty-nine weeks ended November 2, 2002 and November 3, 2001, interest
expense amounted to $2,161,000 and $2,983,000 respectively, and
interest income amounted to $1,513,000 and $2,400,000, respectively.
7. ADVERTISING BARTER TRANSACTIONS
During fiscal year 2002, the Company entered into advertising barter
transactions whereby advertising space was allotted to third-parties in
the Company's catalog in exchange for production of Limited Too
television commercials, airtime and other advertising. The Company
accounts for barter transactions in accordance with EITF 99-17,
"Accounting for Advertising Barter Transactions." EITF 99-17 requires
that barter transactions be recorded at the fair value of advertising
surrendered only if the fair value is determinable based on the
entity's own historical practice of receiving cash for similar
advertising. No revenues or expenses were recorded for the thirteen and
thirty-nine weeks ended November 2, 2002.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations," will be effective in the
first quarter of 2003. The standard requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the corresponding estimated retirement
cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. Because costs associated with exiting leased
properties at the end of the lease terms are minimal, the Company
believes that when the statement is adopted, it will not have a
significant effect on the Company's results of operations or its
financial position.
9
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was
issued by the Financial Accounting Standards Board during the second
quarter of 2002. SFAS 145 eliminates FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." As a result, gains and losses from
extinguishment of debt should be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board (APB) Opinion
No. 30. SFAS 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission
of Statement 4 shall be applied in fiscal years beginning after May 15,
2002. The provisions of this Statement related to Statement 13 are
effective for transactions occurring after May 15, 2002. All other
provisions of this Statement are effective for financial statements
issued on or after May 15, 2002. The Company believes that the adoption
of the provisions of this statement related to the rescission of
Statement 4 will not have a significant effect on the Company's results
of operations or its financial position. The adoption of the other
provisions of this statement did not have a material impact on the
Company's consolidated financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued by the Financial Accounting Standards Board
during the second quarter of 2002. SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS 146 eliminates the definition and
requirement for recognition of exit costs in EITF Issue No. 94-3 where
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair value. This
statement is effective for exit or disposal activities initiated after
December 31, 2002. The Company believes that the adoption of this
statement will not have a significant impact on its results of
operations or financial position.
9. COMMON STOCK FINANCING
On April 29, 2002, the Company filed a registration statement on Form
S-3, File Number 333-87188, with the Securities and Exchange Commission
to sell up to 2.8 million shares of its common stock.
On May 24, 2002, the Company sold 2.4 million shares of its common
stock, resulting in net proceeds of $73.4 million. On that day, the
Company paid off the entire $50 million term loan due under the Credit
Facility and the remaining proceeds from the sale of common stock will
be used for general corporate purposes. The $50 million revolving loan
commitment under the Credit Facility remains in effect and is available
to the Company for future business purposes.
10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Too, Inc.:
We have reviewed the accompanying consolidated balance sheet of Too, Inc. and
its subsidiaries (the "Company") as of November 2, 2002, and the related
consolidated statements of income for each of the thirteen and thirty-nine week
periods ended November 2, 2002 and November 3, 2001 and the consolidated
statements of cash flows for the thirty-nine week periods ended November 2, 2002
and November 3, 2001. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of February
2, 2002, and the related consolidated statements of income, shareholders'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated February 20, 2002 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of February 2, 2002
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
November 13, 2002
11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net sales for the thirteen weeks ended November 2, 2002 were $164.6 million, an
increase of 11% from $148.8 million for the comparable period of 2001. Gross
income increased 15% to $59.0 million from $51.4 million in 2001 and operating
income rose 30% to $17.4 million from $13.4 million in 2001. Net income
increased 35% to $10.8 million from $8.0 million in 2001. Diluted earnings per
share increased 24% to $.31, versus $.25 in 2001.
Net sales for the thirty-nine weeks ended November 2, 2002 were $464.5 million,
an increase of 13% from $410.9 million for the comparable period of 2001. Gross
income increased 18% to $162.0 million from $137.3 million in 2001 and operating
income rose 47% to $37.0 million from $25.1 million in 2001. Net income
increased 51% to $22.2 million from $14.7 million in 2001. Diluted earnings per
share increased to $.65, a 41% increase, versus diluted earnings per share of
$.46 in 2001.
FINANCIAL SUMMARY
The following summarized financial and statistical data compares the thirteen
and thirty-nine weeks ended November 2, 2002, to the comparable 2001 period:
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------------- -------------------------------------------
November 2, November 3, Percent November 2, November 3, Percent
2002 2001 Change 2002 2001 Change
---------------------------------------- -------------------------------------------
Net sales (millions) $ 164.6 $ 148.8 11% $ 464.5 $ 410.9 13%
Comparable store sales performance/(1)/ (1%) 5% 1% 1%
Retail sales per average square foot/(2)/ $ 80 /(3)/ $ 83 /(3)/ (4%) $ 233 /(3)/ $ 233 /(3)/ 0%
Retail gross square feet at end of
quarter (thousands) 2,041 /(3)/ 1,850 /(3)/ 10%
Stores with "Girl Power" format 264 206
Percentage of Limited Too stores in
"Girl Power" format 53% 46%
Number of Stores:
-----------------
Limited Too:
Beginning of period 484 422 459 406
Opened 15 30 42 47
Closed (2) - (4) (1)
----------------------- ------------------------
End of period 497 452 497 452
======================= ========================
mishmash 11 6 11 6
======================= ========================
(1) A store is included in our comparable store sales calculation once it has
completed 52 weeks of operation. Further, stores that have changed more
than 20% in square feet are treated as new stores for purposes of this
calculation. Fiscal 2001 comparable store sales are reported on a
calendar-shifted basis.
(2) Retail sales per average square foot is the result of dividing net sales
for the fiscal quarter by average gross square feet, which reflects the
impact of opening and closing stores throughout the quarter.
(3) Amounts exclude mishmash stores.
12
Net Sales
Net sales for the third quarter of 2002 increased 11% to $164.6 million from
$148.8 million in 2001. Comparable store sales were -1% for the third quarter of
2002 compared to 5% comparable store sales during the third quarter of 2001. Net
sales benefited from a 10% year on year increase in Limited Too square footage.
Year-to-date net sales were $464.5 million, a 13% increase over 2001
year-to-date sales of $410.9. The increase was due to the net addition of 38 new
Limited Too stores. Also, comparable store sales rose 1% on a year-to-date
basis.
The best performing merchandise categories during the thirteen and thirty-nine
weeks ended November 2, 2002 were cut and sewn casual tops, active bottoms,
denim and skirts. During the quarter, a good sales performance was turned in by
the non-apparel areas led by innerwear, candy and toys, as well as lifestyle
accessories.
Gross Income
Gross income, expressed as a percentage of net sales, was 35.9% for the third
quarter of 2002, an increase of 140 basis points from a gross income rate of
34.5% for the third quarter of 2001. This rate increase was due to higher
initial mark-ups and a lower markdown rate.
For the year-to-date period, the gross income rate increased 150 basis points to
34.9% from 33.4% in 2001. Higher initial mark-ups and a lower markdown rate more
than offset costs associated with increased catalog circulation.
General, Administrative and Store Operating Expenses
General, administrative and store operating expense, expressed as a percentage
of net sales, was 25.3% for the third quarter of 2002, a decrease of 20 basis
points from a rate of 25.5% for the third quarter of 2001. This rate decrease
was primarily due to lower distribution center costs, and lower store expenses
as a rate to sales, which more than offset the increase in marketing and home
office expenses.
On a year-to-date basis, general, administrative and store operating expense
decreased by 40 basis points to 26.9% in 2002 from 27.3% in 2001. The decrease
during the year-to-date period was due to lower distribution center, catalog and
web related expenses, along with a decrease in the store payroll rate.
Operating Income
Operating income, expressed as a percentage of net sales, was 10.6% in the third
quarter of 2002, an increase of 160 basis points from 9.0% for the same period
in 2001. The year-to-date operating income rate increased to 8.0% in 2002
compared to 6.1% in 2001. The increase in the operating income rate for both the
quarter and year-to-date periods was due primarily to higher merchandise margins
and lower general, administrative and store operating expenses expressed as a
percentage of sales.
Income Taxes
Income tax expense during the third quarter amounted to $6.7 million and $14.1
million for the quarter ending and year to date period ending November 2, 2002,
respectively, compared to $5.3 million and $9.8 million for the comparable
periods ending November 3, 2001. During the second quarter, the income tax
provision rate decreased from 40.0% to 38.5% as a result of realigning our
corporate operations.
13
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided from operating activities provides the resources to support
operations, including projected growth, seasonal working capital requirements
and capital expenditures.
Net cash provided by operating activities amounted to $32.5 million for the
thirty-nine weeks ended November 2, 2002 versus $18.9 million for the same
period in 2001. The increase in net cash provided by operating activities versus
the comparable period in 2001 was due to an increase in net income, accounts
payable and accrued expenses, as well as lower inventory levels. These items
more than offset the decrease in income taxes payable.
Investing activities represented capital expenditures, which were primarily for
new and remodeled stores, as well as progress payments on the construction of
our new home office and distribution center. Capital expenditures on the home
office and distribution center amounted to $15.2 million and $6.8 million,
respectively.
Financing activities represented the issuance of restricted stock, proceeds from
the issuance of 2.4 million shares of common stock and the corresponding
repayment of the term loan, along with the proceeds from employee stock option
exercises.
A summary of our working capital position and capitalization follows
(thousands).
November 2, February 2,
2002 2002
------------- -------------
Working capital, including current portion of
long-term debt of $0 and $17,500 at
November 2, 2002 and February 2, 2002,
respectively $ 76,903 $ 23,815
=========== ===========
Capitalization:
Long-term debt - 32,500
Shareholders' equity 230,491 128,209
----------- -----------
Total capitalization $ 230,491 $ 160,709
=========== ===========
Amounts authorized under revolving portion
of credit facility $ 50,000 $ 50,000
=========== ===========
In August 1999, we entered into a five-year, $100 million collateralized Credit
Facility. The Credit Facility consisted of a $50 million five-year term loan and
a $50 million, five-year annual revolving credit commitment. The Credit
Facility's interest rates, which reflect matrix pricing, are based on the London
Interbank Offered Rate or Prime plus a spread as defined in the agreement. The
term loan was interest only until the end of the third year at which time the
amortization of the outstanding principle balance would have begun. The Credit
Facility contains customary representations and warranties as well as certain
affirmative, negative and financial covenants.
14
On May 24, 2002, the Company sold 2.4 million shares of its common stock,
resulting in net proceeds of $73.4 million. On that day, the Company paid off
the entire $50 million term loan due under the Credit Facility and the remaining
proceeds from the sale of common stock will be used for general corporate
purposes. The $50 million revolving loan commitment under the Credit Facility
remains in effect and is available to the Company for future business purposes.
No amounts were borrowed against the $50 million revolving credit commitment
during the thirty-nine weeks ended November 2, 2002.
Capital Expenditures
Capital expenditures totaled $36.0 million for the thirty-nine weeks ended
November 2, 2002 compared to $54.0 million for the comparable period of 2001.
The decrease is primarily due to costs the Company incurred in 2001 for the
construction of the new distribution center and home office. 2002 capital
expenditures included $14.0 million for new and remodeled stores, $6.8 million
for the new distribution center and $15.2 million for the new home office and
other items. We anticipate spending under $40 million in 2002 for capital
expenditures including the construction of approximately 56 new Limited Too
stores, five new mishmash stores and the remodeling of approximately nine
stores. Our store expansion and remodel program should add 210,000 to 220,000
gross square feet during 2002, representing an 11% to 12% increase over year-end
2001. The Company expects that capital expenditures will be funded principally
by net cash provided by operating activities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that impact the amounts reported in the Company's consolidated
financial statements and related notes. On an on-going basis, management
evaluates its estimates and judgments, including those related to inventories,
long-lived assets and sales returns. Management bases its estimates and
judgments on historical experience and various other factors that are believed
to be reasonable under the circumstances. Actual results may differ materially
from management's estimates. Management believes the following estimates and
assumptions are most significant to reporting the Company's results of
operations and financial position.
Inventories - Inventories are valued at the lower of average cost or market, on
a first-in, first-out basis, utilizing the retail method. Under the retail
method, the valuation of inventories at cost and the resulting gross margins are
calculated by applying a cost-to-retail ratio to the retail value of
inventories. The use of the retail method will result in valuing inventories at
the lower of cost or market if markdowns are currently taken as a reduction of
the retail value and cost of inventories. Inherent in the retail method are
certain significant management judgments and estimates including, among others,
initial merchandise markup, markdowns and shrinkage, all of which significantly
impact the ending inventory valuation at cost as well as the resulting gross
margins. The Company calculates inventory costs on an individual item-class
basis to ensure a high degree of accuracy in estimating the cost. Inventory
valuation at the end of the first and third quarters reflects adjustments for
inventory markdowns and shrinkage estimates for the total selling season.
Long-Lived Assets - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Service lives are established for
store assets ranging from 5 to 10 years for building improvements and 3 to 10
years for other property and equipment. Property and equipment at the home
office and distribution center is assigned service lives between 5 and 20 years.
The distribution center and home office buildings are depreciated over 40 years.
Assets are reviewed on an annual basis for impairment, and based on management's
judgment, are written down to the estimated fair value based on anticipated
future cash flows.
Sales Returns - Sales are recorded when the customer takes possession of
merchandise. A reserve is provided for projected merchandise returns based on
prior experience.
15
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," will be effective in the first quarter of 2003.
The standard requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes the corresponding
estimated retirement cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Because costs associated with exiting leased properties at the end of the lease
terms are minimal, the Company believes that when the statement is adopted, it
will not have a significant effect on the Company's results of operations or its
financial position.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" was issued by the Financial
Accounting Standards Board during the second quarter of 2002. SFAS 145
eliminates FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." As a result, gains and losses
from extinguishment of debt should be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board (APB) Opinion No. 30. SFAS
145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 are effective for transactions occurring after
May 15, 2002. All other provisions of this Statement are effective for financial
statements issued on or after May 15, 2002. The Company believes that the
adoption of the provisions of this statement related to the rescission of
Statement 4 will not have a significant effect on the Company's results of
operations or its financial position. The adoption of the other provisions of
this statement did not have a material impact on the Company's consolidated
financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
was issued by the Financial Accounting Standards Board during the second quarter
of 2002. SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. SFAS 146
eliminates the definition and requirement for recognition of exit costs in EITF
Issue No. 94-3 where a liability for an exit cost was recognized at the date of
an entity's commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair value. This
statement is effective for exit or disposal activities initiated after December
31, 2002. The Company believes that the adoption of this statement will not have
a significant impact on its results of operations or financial position.
16
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Management's Discussion and Analysis or made by management of the Company
involve risks and uncertainties and are subject to change based on various
important factors, many of which may be beyond the Company's control.
Forward-looking statements are indicated by words such as "anticipate,"
"estimate," "expect," "intend," "risk," "could," "may," "will," "pro forma,"
"likely," "possible," "potential," and similar words and phrases and the
negative forms and variations of these words and phrases, and include statements
in this Management's Discussion and Analysis relating to anticipated capital
expenditures in 2002 for new stores, the remodeling or expansion of existing
stores and the related funding thereof. The following factors, among others, in
some cases have affected, and in the future could affect, the Company's
financial performance and actual results and could cause future performance and
financial results to differ materially from those expressed or implied in any
forward-looking statements included in this Management's Discussion and Analysis
or otherwise made by management: changes in consumer spending patterns, consumer
preferences and overall economic conditions; the impact of competition and
pricing; changes in weather patterns; currency and exchange risks; changes in
existing or potential trade restrictions, duties, tariffs or quotas; changes in
political or financial stability; changes in postal rates and charges and paper
and printing costs; availability of suitable store locations at appropriate
terms; ability to develop new merchandise; ability to hire and train associates;
and/or other risk factors that may be described in the Safe Harbor Statement and
Business Risks section of the Company's Form 10-K, filed April 29, 2002, as well
as other filings with the Securities and Exchange Commission. Future economic
and industry trends that could potentially impact revenue and profitability are
difficult to predict. Therefore, there can be no assurance that the
forward-looking statements included herein will prove to be accurate. In light
of the significant uncertainties in the forward-looking statements included
herein, the inclusion of such information should not be regarded a
representation by the Company, or any other person, that the objectives of the
Company will be achieved. The forward-looking statements made herein are based
on information presently available to the management of the Company. The Company
assumes no obligation to publicly update or revise its forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes the Company's exposure to interest rate and market risk
associated with financial instruments is not material in as much as there is no
outstanding debt.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation, our
Chief Executive Officer along with our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC reports. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Since the date of our evaluation to the filing date of this Quarterly Report on
Form 10-Q, there have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15 Letter re: Unaudited Interim Financial Information to Securities
and Exchange Commission re: Incorporation of Report of Independent
Accountants.
99.1 Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOO, INC.
(Registrant)
By /s/ Kent A. Kleeberger
----------------------
Kent A. Kleeberger
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(duly authorized officer and Principal
Financial and Accounting Officer)
Date: December 13, 2002
19
CERTIFICATION
I, Michael Rayden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Too, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 13, 2002
/s/ Michael Rayden
---------------------
Michael Rayden
President, Chief Executive Officer and
Chairman of the Board of Directors
20
CERTIFICATION
I, Kent Kleeberger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Too, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material inf ormation relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 13, 2002
/s/ Kent A. Kleeberger
--------------------------
Kent A. Kleeberger
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
21
EXHIBIT INDEX
Exhibit
No. Document
15 Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Incorporation of Report of Independent
Accountants.
99.1 Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
22